What is Bank Guarantee
Bank Guarantee is normally required to secure Government Contracts.
Government gives contract for work only if business submits this Bank Guarantee
This guarantee secures the Government that if Business fails to meet contract terms,Bank will pay Government the damages
Procedure for Bank Guarantee (Example)
- Company wants Government Contract
- Government puts condition on company to give Bank Guarantee of a fixed amount.
- Now Company approaches Bank for issue of Bank Guarantee
- Bank asks for FD of a fixed amount as security and charges commission to issue Bank Guarantee
- Contract is completed
- Bank Guarantee revoked
- FD Returned including Interest on FD
Company pays commission and receives interest On FD
Company wanted to apply for a Government Contract with Railway Mininstry
where company would sell goods to Government of Rs 100 lacs
To secure contract,Bank Guarantee of 40.00,000 was required.
Company took this Bank Guarantee from PNB Bank of Rs 4000000 for 3 months
Bank took 2 % Commission p.a. and Asked for 25% Margin money in the form of a FD
Interest earned on FD was 8% p.a
Government Contract completed and money received from government
Bank Guarantee revoked
FD Returned including Interest on FD
Pass Entries in books of company
Commission charges on bank guarantee:
Commission charges A/c Dr 20000
To Bank A/c 20000
25% Margin money in the form of FD :
8% FD A/c Dr 1000000
To Bank A/c 1000000
Interest Earned on FD:
8% FD A/c Dr 20000
To Interest Income A/c 20000
At the time bank guarantee was revoked and FD was matured:
Bank A/c Dr 1020000
To 8% FD A/c 1020000
Points to Remember:
- No entry is passed for issue of a bank guarantee.
- Bank guarantee is a contingent liability, hence shown in notes to accounts in financial statements.